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Biggest COVID impact for reinsurers is the investment environment: Transatlantic CEO

27th October 2020 - Author: Luke Gallin

As the ongoing COVID-19 pandemic exacerbates the lower for longer interest rate environment, reinsurance companies have once again placed an emphasis on underwriting profitability.

In recent times, the underwriting performance of the global reinsurance industry has been challenged as rate changes and terms and condition improvements have lagged the primary marketplace.

The sector has fallen to an underwriting loss for the past three years and there’s every chance 2020 will continue the trend as COVID-19 drives heightened losses against a backdrop of fading investment returns.

In a panel session held earlier today by S&P Global Ratings, executives from across the insurance and reinsurance sectors debated the impact of the pandemic on the global reinsurance industry.

Unsurprisingly, the uncertain business interruption outlook was highlighted as was the potential for more claims to come from lines like event cancellation in Q4 2020 and beyond.

While the losses on the underwriting side of the balance sheet continue to grow and remain uncertain, according to Mike Sapnar, President and Chief Executive Officer (CEO) of Transatlantic Holdings, the largest impact for the reinsurance industry is with investments.

“To me, the biggest impact of COVID-19 ultimately for the industry is the investment environment, the interest rate environment, the impact on investment income, and the need to drive returns from underwriting result,” said Sapnar.

Adding: “Much of the industry has been around breakeven, to plus or minus a little bit of loss or profit, over the last four years. We haven’t even really had a massive cat during that period, we’ve had a lot of medium to smaller sized cats.

“So, when I look at this, and I look at it in the future, it’s really the investment environment that ultimately changes the business model for the reinsurance marketplace, because investment leverage is a big part of our returns. And if most companies are leveraged at two to one and interest rates are falling significantly, that’s going to take a meaningful bite out of your return on equity (ROE).”

Of course, reinsurance pricing started to trend more favourably prior to the coronavirus outbreak, driven in part by damage done to investment prospects as a result of the lower for longer interest rate environment. This caused reinsurers to focus more on underwriting profit as a driver of overall returns, and it seems that the arrival of a global pandemic has accelerated the need for an improved underwriting performance across the industry.

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